Tax Credit and Deduction Adjustments to Be Aware Of

by Derek Clark

While tax season is thankfully far from the near future, it is still never too early to begin thinking about preparing your taxes for next year as this will allow you to take advantage of deductions that you may have missed otherwise. As you may be painfully aware of, each year tax deductions are subject to change and ones that you were normally able to claim may no longer be applicable. The year 2009 emerged as a clear example of just how drastically tax guidelines can change, as new credits were introduced in order to help taxpayers through the economic downturn. 2010 has already seen its fare share of alterations and if the HR 4213, American Jobs and Closing Tax Loopholes Act, is passed these changes will only be the beginning.

End of Vehicle Sales Tax Deductions

In the previous year any taxpayer who purchased a new motor vehicle between 2/16/09 and 1/1/2010 was eligible to take tax deductions on the sales tax that they paid. This was applicable for anything from light trucks, new cars, motorcycles and even mobile homes and was perhaps most importantly applied in addition to state and local income taxes. Taxpayers who fell below income thresholds were allowed to declare the sales tax deduction even if they did not itemize for up to $49,500 paid for the motor vehicle. Currently, this deduction has not been extended for the year 2010, forcing those taxpayers who itemize to choose between taking the sales or income state and local tax deductions.

Changes to Hope Credit

Previously the Hope Credit permitted parents who had children pursuing a post-secondary education to claim tax credit for the first two years. This newly modified bill, now the American Opportunity Tax Credit, can be applied for the first four years of continued education and allows guardians to claim up to $2,500 in tax credit for the year 2010. The bill now also offers additional relief to those forced to carry the burden of tuition bills and is now also applicable to ‘related expenses’ as well, which can include anything from text books to other required course material.

End of Teacher Supplies Tax Deduction

While previously teachers and other educators alike were able to deduct up to $250 in taxes for supplies for the classroom without having to itemize, this bill is coming to an end as it has not yet been extended for 2010.

Expiring Home-Buyer Tax Credit

The Home-Buyer Tax Credit was established in 2008 and had since been re-established into April 30th, 2010 through the Reinvestment and American Recovery Act. In this act, if you bought a home or signed a contract prior to April 30th you could claim this credit on your tax return for 2010, assuming you had not applied it for 2009. An act that was recently approved will allow any homeowner who had a contract signed by April 30th this year to close by September 30th if they wish to claim it on their 2010 tax return. This was an extension from the previous deadline of June 30th.

Tax Credit for Energy Savings

While this Energy Efficiency Tax Incentives credit is nothing new, it has not currently been extended beyond 2010. Through this act, taxpayers were eligible to receive tax credits for making energy improvements to existing homes including enhancements pertaining to doors, windows, HVAC equipment, insulation, water heaters and even biomass stoves. This act allowed homeowners to apply a 30% credit for the cost up to $1,500. Once again, this act is due to expire at the end of the year so make sure to take advantage of any relevant energy home improvements now.

Modifications to Alternative Minimum Tax

In 2009 through the American Recovery and Investment Act, the Alternative Minimum Tax exemption income levels were raised for both joint and single filers. Currently, the levels are due to significantly decrease from those established in 2009, increasing to $70,950 for joint filers and $46,700 for single filers.

While this list does not include all modifications and changes made it is important to keep them in mind when preparing for the upcoming tax season. Remember, each person’s financial situation is unique so it is important to consult with a tax professional regarding any changes that may affect you in order to ensure that you are not only taking full advantage of tax deductions that may apply, but also to prevent any conflict with the IRS.

Additional Property Tax Deductions

In order to provide additional tax relief to homeowners during the economic hardships, the Housing Assistance Tax Act of 2008 was passed. This bill permitted homeowners to deduct an extra $500, or $1,000 if filing jointly. While generally those who do not itemize are recommended to simply take the standard deduction, this additional deduction allowed them to not only deduct the property taxes but apply the standard deduction as well. Unless extended, this bill is will expire in 2010.

Complete End of the Estate Tax

In 2001 the Economic Growth and Tax Relief Reconciliation Act was passed to phase out the estate tax over the next 10 years, ending in 2010. While congressmen have acknowledged this and claim they will address the issue, no action has thus far been taken. As of now, it is predicted that in 2011 the estate tax will return to 55% for any estates valued at over $1,000,000.

Taxable Unemployment Benefits

While in 2009, the first $2,400 benefits received for unemployment were not taxable, they will be for this year.

Roth IRS Conversion Changes

For 2010, the income restriction for converting an IRA or 401K to a Roth IRA has been removed. This allows taxpayers making a conversion in 2010 the option of paying half of their taxes in 2011 and the remainder in 2012. Remember that this option is only available for those who convert this year. In addition, those with high incomes can contribute to a 401K or traditional IRA and then switch to a Roth IRA, thereby avoiding any contribution limits in place on a Roth IRS. However, regardless of your situation it is advisable that you consult a tax professional or advisor to avoid additional complications.

Tax Rates for Capital Gains and Dividends

For taxpayers in the 10-15% tax bracket, tax rates for capital gains will remain on zero for 2010. However, those in higher tax brackets can expect to pay 15% for long term capital gains. Keep in mind that these rates along with income tax bracket percentages are predicted to rise for 2011 as Bush tax cuts expire.

End of Sales Tax Deductions

For the past two years, taxpayers on Schedule A that were itemizing deductions were allowed to declare a state sales tax deduction when completing Federal Income taxes. Keep in mind that when itemizing deductions, taxpayers are obligated to choose between declaring a deduction for state and local sales or income taxes and with the exception of 2009 were not permitted to select both. While this could be extended, it is unlikely as it has not yet been addressed by the senate and appears to be gone for 2010. However, most taxpayers will go unaffected by this change because state and local taxes are often much higher that sales taxes.

This guest post was provided by, a site that specializes in solutions to specific IRS tax debt problems by offering guidance as well as services by tax professionals such as tax accountants, former IRS agents, and tax debt attorneys.


John Salan July 5, 2010 at 11:47 am

Realize too that although the home buyer tax credit act was approved by the house I believe, differences in bills by congress still need to be hashed out. So until that happens, homeowners do not have until September 30th to close (if they had a contract signed on or before April 30th). However, it is very likely that this will happen either with the current 4213 bill or another bill.

Cars July 14, 2010 at 5:44 am

related educational expenses are not taxed so long as what you are learning supports the work you are currently doing. Cars

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